Experimentation, Patents, and Innovation

This paper studies a simple model of experimentation and innovation. Our analysis suggests that patents improve the allocation of resources by encouraging rapid experimentation and efficient ex post transfer of knowledge. Each firm receives a signal on the success probability of a project and decide...

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Bibliographic Details
Main Authors: Acemoglu, Daron, Bimpikis, Konstantinos, Ozdaglar, Asuman E.
Other Authors: Massachusetts Institute of Technology. Department of Economics
Format: Article
Language:en_US
Published: American Economic Association 2011
Online Access:http://hdl.handle.net/1721.1/61714
https://orcid.org/0000-0002-1827-1285
https://orcid.org/0000-0003-0908-7491
Description
Summary:This paper studies a simple model of experimentation and innovation. Our analysis suggests that patents improve the allocation of resources by encouraging rapid experimentation and efficient ex post transfer of knowledge. Each firm receives a signal on the success probability of a project and decides when to experiment. Successes can be copied. First, we assume that signal qualities are the same. Symmetric equilibria involve delayed and staggered experimentation, whereas the optimal allocation never involves delays and may involve simultaneous experimentation. Appropriately designed patents implement the optimal allocation. Finally, we discuss the case when signals differ and are private information.